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Investors Cooling on Apartment REITs

Digested from “After Boom, Bust Could Be Upon Apartment REITs”
Wall Street Journal (2/17/15) Whelen, Robbie

After producing robust total returns of 39.7 percent in 2014, real-estate investment trusts (REITs) that specialize in residential apartment buildings are providing returns of -1.1 percent thus far in 2015. 

This negative return is causing some analysts to downgrade the sector, concerned that it is overvalued. 

To a certain extent, REIT stocks are a victim of their own success. Last year they traded at a discount compared to the value of their assets, but given their strong returns, this year they are trading at a premium.

Meanwhile, in the last six months, an apartment building boom has begun; the average pace of 357,000 units a year in that period is 26 percent higher than the 30-year average. Over the next year, investment bank Evercore ISI predicts an increase in apartment vacancy rates in Houston; Washington, D.C.; Charlotte, N.C.; and Austin, Texas.

The National Association of Real Estate Investment Trusts, however, predicts that pent-up demand from people currently living with roommates and parents will more than fill the units in the development pipeline. 

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